TNAG-1773-FCO40-2525-Hong-Kong-Exchange-Fund-Hong-Kong-Futures-Exchange-Limited--1988 — Page 176

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156677

MDLIAN 2835

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FM HONG KONG

TO PRIORITY FCO

TELNO 0231

OF 17010ÜZ JANUARY 88 INFO PRIORITY PEKING

MKC 105/1

RE LIVED IN REGISTRY

19 JAN 1988

TOP COBY a

BANK OF CHINA

ป

PA

WE HAVE BEEN CONSIDERING FOR SOME TIME WHETHER OR NOT TO INVOLVE THE

BANK OF CHINA IN PROVIDING SERVICES TO THE EXCHANGE FUND IN EXCHANGE

RATE INTERVENTION. WE FEEL THAT IT WOULD BE TO OUR ADVANTAGE IF THE

BANK OF CHINA IS SEEN TO BE IN ACTION IN THE FOREIGN EXCHANGE MARKET IN A WAY SUPPORTIVE OF THE MAINTENANCE OF THE LINK, PARTICULARLY AT TIMES SUCH AS NOW WHEN SPECULATIVE PRESSURE IS SUBSTANTIAL.

DETAIL

2. THE EXCHANGE FUND INTERESTS IN THE MONEY MARKET BY BUYING AND

SELLING US DOLLARS AGAINST HONG KONG DOLLARS IN BOTH THE SPOT AND FUTURE MARKETS. SOME OF THIS INTERVENTION IS CARRIED OUT THROUGH LOCAL BANKS. WE HAVE HITHERTO BEEN USING ALMOST EXCLUSIVELY THE HONG KONG AND SHANGHAI BANKING CORPORATION (HSBC) FOR THIS, INVOLVING ONLY OCCASIONALLY OTHER MAJOR BANKS SUCH AS STANDARD CHARTERED AND

THE HANG SENG BANK.

3. IN EARLY 1987 WE ALSO DEVELOPED A FORM OF INTERVENTION SPECIFIC- ALLY TO TACKLE THE SITUATION WHEN THE HONG KONG DOLLAR IS STRONGER THAN US DOLLAR 7.8U. THIS INVOLVES THE USE OF THE EXCHANGE FUND TO INDEMNIFY HSBC AGAINST ANY LOSS THAT MAY BE INCURRED WHEN THEY INTERVENE STRICTLY IN ACCORDANCE WITH OUR INSTRUCTIONS BUT ON THEIR OWN ACCOUNT. THE INDEMNITY ARRANGEMENT ALSO PROVIDES FOR THE PROFITS FROM SUCH INTERVENTION TO BE PAID TO THE EXCHANGE FUND AS AN INDEM- NITY ARRANGEMENT ALSO PROVIDES FOR THE PROFITS FROM SUCH INTERVENTION TO BE PAID TO THE EXCHANGE FUND AS AN INDEMNITY FEE.

4. WE HAVE BECOME RATHER TOO DEPENDENT ON HSBC IN OUR EXCHANGE MARKET INTERVENTION. ALTHOUGH THEY HAVE SO FAR NOT EXPRESSED ANY CONCERN ABOUT THE DISTORTION SUCH ACTIVITY IS CAUSING TO THEIR BALANCE SHEET, THERE MAY COME A POINT WHEN THEY DO. WE THEREFORE CONSIDER SENSIBLE TO SPREAD THE BURDEN. WE HAVE CONSIDERED WHETHER STANDARD CHARTERED WOULD BE SUITABLE CANDIDATE FOR ENTERING INTO AN INDEMNITY

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